April 24, 2007

Frivolous Thoughts on Corporate Law

by PG

My final exam is on Friday. During today's review session, I asked whether Bubbles the porn star mentioned in an old exam question was a red herring or was meant to draw out the fullest extent of possible insider trading implications (given that Bubbles is not mentioned as ever engaging in stock market investments, nor even as understanding English, I thought not). Keeping me from being the only person with a silly question, a classmate asked the professor to explain the transaction behind Barbarians at the Gate.

Meanwhile, today Netflix delivered Wall Street, which I've never before seen. But I think the ultimate 1980s corporate law movie that no one else thinks of as a corporate law movie is Pretty Woman. The hero's redemption is from being a corporate raider who engages in hostile takeovers and sells off the parts, to being part of a fine old shipbuilding enterprise likely to employ many unionized workers. State anti-takeover provisions wouldn't be necessary if every hostile bidder has a hooker with a heart of gold to set him straight.

Morgan Stanley Investment Management seems a bit petulant. Given that NYT Class A shares are publicly traded and presumably are the type that MSIM owns, if they're not happy with how the Class B shares are getting voted -- particularly, how Ochs's descendants keep electing directors who aren't making the company as profitable as it ought to be -- they can always vote with their feet. I have heard that it tends to be either employees of a company or people with a stake in its actions (e.g., people who live in the city where it operates) who are the activist shareholders. But I'm puzzled as to why investors with no such connection would be making a stink about how the Times Company operates instead of simply dropping what they perceive to be a loser in the market. Perhaps doing so would entail a loss at this point, in which case it's a nice act of faith on the dissident shareholders' part to hang in there thinking that different management could turn NYT into a cash cow and bring the share price up even though the company's currently in the red.

According to an older article, "Morgan Stanley Investment Management, which has a 7.6 percent stake in the Times Company, has been a shareholder since 1996 through its Global Franchise fund, one of its better-performing fund offerings. The fund, based in London, takes large positions in a small number of companies that it believes are undervalued and have unique global brands." Only Class B directors sit on the compensation committee, but the only concession to the complaints that seems to have been made thus far is that a couple executives are having their compensation reduced by not getting stock options for 2006 and 2007. (And if stock price isn't looking good, that's not a massive concession.) So MSIM might be bringin' it to a proxy fight. PROXY FIGHT!

The argument, to be nonfrivolous for a moment, is about that split governance structure. Under the dual ownership structure, the Family owns almost 20 percent of Class A shares, which makes the vote-withholding 42 percent of shares a majority of non-Ochs stock; the Family also owns 89 percent of Class B shares and elects 70 percent of the board, which guarantees that control never leaves the Family's hands.

At the heart of the dispute over the capital structure is a more fundamental tension between the interests of the Sulzberger family, which sees itself as the guardian of The Times newspaper, and its institutional investors, who argue that the company’s dual class structure prevents the company from being fully accountable to all shareholders.

"This is a governance issue," said Charles M. Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "If you own 100 percent, you do whatever you want. Once you enter the public, your obligations change."

For advice on its governance practices, the Times Company’s board has hired Martin Lipton, a lawyer with experience in advising directors. For public relations counsel, the board has hired Paul Verbinnen, president of Sard Verbinnen.

With Lipton giving them advice, there's no way Morgan Stanley is going to get the Family dislodged. Hurrah for the dead hand of Adolph Ochs!
April 24, 2007 10:22 PM
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